abrdn plc

abrdn published its 2023 annual report on 27th February. The shares have attracted a fair amount of short interest, which we expect is at least partly to do with the structural challenges faced by the company. We don’t take a view on this, however our software picked up on a potential accounting risk related to “Accrued Income” (categorized as a “Contract Asset” within our system). Here is the relevant extract from our automated report:

Digging into the annual report itself, we find the company’s disclosure of accrued income in Note 3(d) (extract below):

We can see that the accrued income balance has been steadily rising, growing by 18% since 2022. The company explain in the annual report that “accrued income” relates to management fees which have been earned, but not yet invoiced. In addition, performance fees may also be recognised once it is “highly probable” that a significant reversal will not occur (see disclosure extract below):

What we find strange is that the accrued income balance has risen by 18% during a period in which overall revenue is declining, and combined management and performance fees have declined by 32% (see chart below, source: FA calculations). In 2022, the accrued income balance represented around 71 days of fees. However as at the end of 2023, the balance represents 122 days (or 4 months of fee income). This is consistent with the company taking a more aggressive approach to revenue recognition.

The recognition of revenue from management fees was something that was raised as a new “Key Audit Matter” by KPMG in the 2022 audit report (and remained a key audit matter in 2023). They cited the increasing complexity of management fee calculations (see extract below)

Further down, KPMG specifically cite the calculation of the accrued income balance as a key risk:

In an environment where a company is facing heavy structural headwinds, there may be strong pressure on management to demonstrate resilience, potentially buying them time to restructure. The use of accrued income is one tool that management could potentially use to enhance revenues and present a better picture to the market than the underlying reality.